Australia needs a national energy savings initiative

A national energy savings initiative that replaces the present patchwork of state-based energy efficiency schemes will see a firm move to address Australia's emissions, independent of a carbon price.

With Julia Gillard’s announcement that the federal election will be held on September 14, the future of Australia’s nascent carbon market is by no means certain.

Coalition policy remains to support a national target of cutting emissions by 5 per cent below 2000 levels by 2020, potentially rising to 15 or 25 per cent if major countries adopt similar targets. But how is this to be achieved in the absence of a carbon price? What other schemes might do the heavy lifting in reducing our national emissions?

The Coalition’s Direct Action Plan envisages a range of policy initiatives, including working with industry to develop unspecified “energy efficiency measures”, which it sees as having the potential to produce an annual emissions reduction of 30 million tonnes of carbon per annum by 2020.

Similarly, the federal government, following recommendations from the Prime Minister‘s Task Group on Energy Efficiency in 2010, is examining the feasibility of, and options for the implementation of, a national Energy Savings Initiative, which would replace existing and planned state-based energy efficiency schemes.

What then is the potential of an ESI to contribute to Australia’s greenhouse gas abatement target?

The Commonwealth government’s working group on a national ESI assumes the scheme, if implemented, will place an obligation on electricity and gas retailers to meet an energy efficiency target in the form of reductions in the consumption of secondary energy.

Such schemes require liable parties, typically energy retailers, to account for a prescribed amount of energy savings. Where an energy retailer demonstrates that it has saved one MWh (or one GJ) of energy from measures it has put in place, a ‘white certificate’ is surrendered to the government regulator which counts against its obligation.

Key energy saving activities mooted within the scheme include: the replacement of incandescent lighting with fluorescent and LED lights; replacement of electric heaters or coolers with gas heaters or heat pumps; replacement of electric hot water systems with gas or solar water heaters; the installation of standby power controllers and in-home displays; installation of electrical appliances with high energy efficiency ratings; and more energy-efficient building standards.

The scheme modelled for the government assumes the overall target will be a 4 per cent reduction in energy use across all end-use sectors of the economy. Annual targets increase from 1 per cent in 2014 to 4 per cent in 2020, remaining at 4 per cent until 2030 when the scheme expires.

To avoid double counting of emissions reductions following Australia’s move to price carbon emissions, a national ESI would most likely target energy consumption rather than specific emissions reductions.

Even with the carbon price in place, RepuTex modelling indicates a reduction in electricity demand of 4 per cent within Australia’s National Electricity Market by 2020 could make up around 50 per cent of Australia’s forecast surplus emissions in 2020. As such, the potential for a national ESI to reduce emissions and contribute substantially to meeting Australia’s Kyoto extension emissions reduction target is significant.

RepuTex research also shows that a 4 per cent annual reduction in electricity consumption could see marginal fossil-fuel based power generation capacity of up to 7,000MW retired from the NEM.

A reduction of this size would likely place a number of NSW-based black coal generators under threat, which generally represent larger, higher fuel-cost plants. This is because large generators tend to rely on peak demand periods, when prices spike, for their profitability. So, any overall reduction in power consumption should have the effect of mitigating such price spikes, thereby constraining plant profitability.

However, should the carbon market continue as legislated, with a national ESI implemented according to the targets set out by the government, RepuTex modelling indicates that the scheme would contribute to downward pressure on Australia’s carbon price immediately following the move to a floating price and Australia’s carbon market linkage with the Europe in financial year 2016.

Reduced demand for electricity under a national ESI is expected to decrease emissions by 47 million tonnes, which may eliminate the immediate need for liable entities to purchase carbon permits from overseas.

The magnitude of the greenhouse gas abatement challenge Australia faces to 2020 is high, and the global and domestic uncertainties surrounding the future of carbon pricing are many.

An ESI that replaces the present patchwork of state-based energy efficiency schemes with a uniform national scheme therefore represents an opportunity to take concrete steps towards addressing Australia's emissions, independent of any carbon price.

Source: RepuTex Carbon Analytics, 2013; AEMO, 2012

Full analysis is available within RepuTex's January Carbon Market Tracker, Complimenting Carbon: A National Energy Savings Initiative and Australia’s Carbon Market.

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